4 out of 10 NFT sales are fake: Learn to spot signs of wash trading

NFT wash trading creates a false popular image to drive up prices and extort collectors. But you can learn how to spot the signs.

Wash trading on the non-fungible token (NFT) market has returned to the spotlight after critics claimed that fast-growing NFT marketplace Blur incentivizes the practice through its trading rewards program.

Beginning February 14, 10% of Blurs’ total token supply was allocated to users based on their trading activity in its second token rewards program. Compared to other leading NFT marketplaces, the platform has seen a surge in transaction volume.

Skeptics claim that wash trading plays a major role, with CryptoSlam reporting that some $577 million worth of NFTs have been washed in recent months, with 80% of transactions on the platform being inorganic. However, opinions vary.

A new Dune Analytics in-depth study from Hildobby argues that the vast majority of platform transaction volume is actually above board due to the way its rewards are structured. But the analysis is far from healthy for the sector, with the same methodology showing that 98% and 85% of volumes for LooksRare and X2Y2 are currently flagged as suspicious, respectively.

To date, the trading volume of the NFT market is reported to be worth $73.8 billion. However, data from Dune Analytics shows that more than 42% of the transaction volume was fake, with $31.2 billion of that being fake transactions.

The implications are wide-ranging. The rising prices and popularity of certain collectibles have made inexperienced Crypto collectors collateral damage. In some cases, criminals have been using NFTs as a means of laundering money.

However, there is some good news for more educated collectors, as most wash trading revolves around the type of NFT collectibles favored by inexperienced or low-informed collectors.

Of course, in an absolute sense, there has been a lot of wash trading, but in any case, this has mainly happened to NFT collectibles with a bad reputation.

What is NFT wash trading?

Wash trading itself is not a new phenomenon. The term originated in the early 1900s, when the American practice of wash sales involved selling securities before the end of the tax year to claim a loss and buying them back immediately afterwards.


An artist’s impression of a typical wash trading scene. (pixels)

Cryptocurrency wash trading was an offshoot of these early practices, in which individuals or colluding parties bought and sold specific financial assets among themselves to create the perception of higher volume or liquidity. Exchanges and projects do this mostly to make themselves appear more popular.

It is worth noting that wash trading is illegal in several jurisdictions around the world and banned by major regulators. Considered a form of market manipulation, the practice is harmful to investors and a threat to the integrity of financial markets.

Given that the cryptocurrency space is still in its infancy, regulators are still trying to grasp the details. This leaves cryptocurrency and NFT wash trading in a gray area, where the practice is unchecked and unregulated. However, President Joe Biden has proposed plugging a loophole in the upcoming budget that would make the practice illegal for crypto assets in the United States.

Research conducted by analysts and insights provided to Cointelegraph Magazine by industry experts reveal that a large number of NFT markets are being faked.

NFT wash trading and money laundering

Hildebert Mouli is one such expert whose in-depth research has brought NFT wash trading into the spotlight in late 2022. By day, Murley is a data scientist at Dragonfly, a cryptocurrency investment firm. In his spare time, Mouli builds a data dashboard that demystifies wash trading in the NFT space.

His popular post on Dune late last year found that around 80% of total NFT trading volume in January 2022 came from wash trading, and that figure averaged around 58% for all of 2022. The Moulis method for routing wash trades utilizes four specific filters.

First, addresses that are both buyers and sellers of a particular NFT are marked. The second filter identifies transactions going back and forth between two different wallets. If an address has purchased the same NFT three or more times, it is also identified as a potential wash trade. A final filter is used to identify addresses or transactions that circumvent the above methods by checking whether the buyer and seller addresses are funded by the same wallet.

After applying all of these filters, Moulis data shows that 42% of current NFT trading volume is driven by wash trading in the 29 major NFT marketplaces operating today.

Blockchain analysis firm Chainalysis also delved into NFT wash trading in two separate reports through 2022. A key takeaway from his research highlighted that 110 profitable wash traders netted $8.9 million last year. The company told the magazine that government agencies have shown interest in understanding NFT wash trading, but declined to provide any details.

Chainalysis also keeps a close eye on illicit funds moving through the cryptocurrency ecosystem. Its tool found that funds sent from illicit addresses increased by the end of 2021, with about $2.4 million flowing into the NFT market in the last two quarters of the year.

The report concluded that the amount of illicit funds sent to money laundering-related NFT markets pales in comparison to the $8.6 billion worth of crypto-based money laundering that Chainalysis monitored in 2021. However, this practice is an option for cybercriminals.

money laundering

Money laundering through NFT laundering transactions is only a small part of the problem (Chainalysis) Which NFT market has the fewest money laundering transactions?

The Moulis study highlighted LooksRare and X2Y2 as the two worst offenders, with 94.7% of LooksRares volume and 85% of X2Y2s volume allegedly attributed to fake transactions. This is significant, as the two platforms processed combined transaction volumes of $27.6 billion and $4.2 billion, respectively.

OpenSea remains the largest NFT marketplace by volume, but it has a clearer track record, with only 2.35% of the $33.1 billion in total volume attributable to the practice.

Blur (14%), Sudoswap (11%), Skillet (17%), and BitKeep (12.8%) all have wash trade percentages in the mid-teens, while NFT aggregator Element ranks third at 63% Some of its $94.3 million in trading volume was flagged as wash trading.

DappRadar shared data with Cointelegraph, corroborating Moulis’ insights. From January 2022 to March 2023, LooksRare had 20,743 NFTs flagged for possible wash sales, while X2Y2 had 11,289.

OpenSea has a total of 4,357 NFTs flagged for possible wash sales, while Blur has generated 2,285 over the past four months.

According to DappRadars data, the possible wash trading volume on LooksRare accounted for 3,361.96% of the total trading volume, while the proportion of X2Y2s was 210.99%.

DappRadar data

Data provided to the magazine by DappRadar breaks down NFT wash trade sales figures by market. (DappRadar) NFT wash trading, explained

Mouli told Magazine that NFT wash trading occurs when a specific NFT is traded between two addresses owned by the same person, with the goal of incorporating it into organic trading activity.

There are two main reasons for this activity. First, trading platforms like LooksRare and X2YX incentivize trading through token rewards. If executed properly, traders will launder trade NFTs, earning profits by obtaining these token rewards to offset consumption.

The second reason is more subversive, as traders look to boost the presence of high volume for a particular collection of NFTs to attract the attention and higher bids of other traders.

If undetected, wash trading may help increase the perceived value of an NFT collectible to other traders, which may allow them to buy/trade it.

However, Mouli argues that it is impossible to simulate organic trading consistently over a long period of time, noting that any collections that are found to be heavily wash-traded will end up being unattractive to potential collectors.

CoinGecko research director Zhong Yang Chan agreed that the intent was to manipulate trading volumes and NFT prices, while adding that tax losses were another driver of the practice.

He said that NFT wash trading has eroded some of the trust and credibility of the market, and it also fueled the NFT bubble in 2021 by enabling projects and participants to play the Crypto growth game.

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According to Chan, wash trading undermines the ability to verify the ownership history of NFTs, which is designed to promote their value and distinguish collectibles from other physical and virtual collectibles. The result is that collectibles experience price distortions and wild swings:

While this won’t affect the authenticity of the NFT, it could affect perceived value and cast doubt on NFT collectibles trying to build a strong community.

Andrew Thurman, an analyst at blockchain analytics platform Nansen, echoed Mouli’s sentiments, highlighting the scams associated with wash trading and the negative impact on real users.

Wash trading small-batch collections may help scammers defraud users in various ways. Thurman pointed to Nansen’s research finding instances of scammers creating and laundering collections of transactions to lure users into minting new NFTs.

Scammers either change the minting price midway, or lead users to trade with themselves to generate transaction fees or sell worthless NFTs.

These NFTs have no organic value and only briefly act as if they have organic value.

Thurman also pointed out that fake transactions can also adversely affect the real users of the NFT market or platform, because it will reduce the number of rewards received by organic users.

How to Prevent NFT Wash Trading

So, how does the industry combat wash trading?

Mouli noted that different NFT marketplaces already have different approaches to reducing wash trading, with fees being a salient point. Fees increase transaction costs, hindering the ability of wash traders to maximize profits.

Marketplace fees and creator royalties are two fee mechanisms for taking profits from traders, and Mouli cited OpenSea as an example. The platform enforced royalties, and other marketplaces followed suit.

According to Mouli, removing the types of rewards that incentivize transactions is another way to curb the practice:

While platforms like LooksRare and X2Y2, which airdrop tokens to users, saw a lot of wash trading, Blur found a new solution by rewarding listings instead of transactions.

According to Chan, the lack of regulation or enforcement in the NFT market is another consideration. Market manipulation and tax loss collection are illegal for traditional financial assets and look set to be enforced by regulators in the future, as Biden’s budget proposals suggest. However, applying existing standards to the nascent Web3 and NFT space may not be so clear cut.

Pedro Herrera, head of research at DappRadar, pointed out that NFT wash trading is getting more and more attention from global regulators and law enforcement, but they now have bigger fish to fry.

The regulatory focus is on cryptocurrency adoption, DeFi and security tokens, he said. The main thing is to first establish the rules of the Web3-based financial layer.

Platforms including OpenSea and Blur have introduced transaction limits as a precautionary measure, Thurman told the magazine. This prevents an NFT from being listed if it has recently changed addresses, but doesn’t completely stop the practice from becoming popular.

Among other things, preventing fake transactions on platforms like LooksRare and Blur is difficult, which is a subset of the Sybil problem, he said.

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Sybil attacks pose a particular threat to blockchains and decentralized networks. Attackers hope to control or influence the system by creating and controlling a large number of pseudonymous wallets, addresses or identities.

As Thurman suggests, in the case of NFT marketplaces, a Sybil attack would allow an attacker to create fake transaction volumes for various NFTs by transacting using multiple different addresses they control anonymously.

NFT Data Provider Excludes Wash Trading

In addition to the obvious effects of artificially inflating prices or exaggerating popularity, fake trading can distort the ability to analyze and monitor cryptocurrency markets. Mouli said that when he set out to provide insights into NFT trading, he first needed to remove the wash trading activity to understand what was really going on.

Any good analyst will tell you that when you want to start researching a data set, the first step is to clean it, he said, adding that many NFT data providers now filter for wash trading activity.

Many major analytics platforms have wash trading filters, and how they are built is often an industry secret, he said.

Thurman shares the Nansens NFT Trend and Index section by way of example, with the wash trade filter on and off. The first graph shows market NFT volume with wash trading removed:


Remove Nansen data for wash trades (Nansen)

The second screenshot includes wash trading and highlights market distortions caused by platforms rewarding trading volume. Products like LooksRare and Blur traded 10 to 20 times as much with the wash trading filter turned off:

Nansen 2

Nansen Data and Wash Volume Increase (Nansen)

Analytics platforms are getting better at identifying and filtering fake transactions, Chan said. This activity manifests itself as a specific trading pattern that allows the algorithm to detect and filter fake trades from real ones:

While wash traders are becoming more sophisticated, analytics platforms are improving their algorithms to detect new wash trading patterns.

Despite his best efforts, Thurman agrees that wash trading always distorts analytical insight to some degree.

How to identify NFT wash trading

A key takeaway is that collectors and NFT traders need to understand wash trading and its impact on the price and volume of collectibles and collectibles. As Thurman puts it: In the meantime, genuine collectors just need to be wary of classic scam vectors.

Vlad Hategan, cryptocurrency expert at dappGambl, highlights useful tips for spotting potential NFT wash trades.

The first port of call is research. Find an artist or artwork and check market demand. Sudden spikes in volume or price are potential red flags. Seemingly unusual patterns, including spikes or sustained low volumes over extended periods of time, are characteristic of manipulative trading practices. There are various wash trading dashboards on Dune that might help.

Stick to reputable marketplaces that enforce a rigorous vetting process for sellers and listings, and avoid platforms that allow anonymous or unverified users to trade NFTs.

Low or discounted prices are another potential sign of a wash trading scheme to attract unsuspecting traders.

Finally, if you have questions, ask for help. Financial advisors and traders familiar with the NFT market can provide good guidance in identifying seemingly unreliable NFTs or transaction data.

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